Debenture is an instrument that is only backed up by the credibility of the issuer in the market and not with any physical asset as such. It is a type of debt instrument which is in an indenture just like other bonds. Debentures are introduced in the market by corporations and government to pool in capital.
Debentures are bought in the market by the investor on the fact that on default the company will be able to repay. In other words the worth of a company in the market and the credibility ratings are two reasons that investor tends to buy debentures. Treasury Bills is an example of bonds that are backed up by the government. These bills are reliable because no matter what happen the government might increase taxes or print new currency notes to pay off these debts.
There are some attributes of debentures which such as availability in certificate form, specified date of interest payment, principal repayment, movable property etc. Another feature include “sinking fund” , which states that the investor may pay some amount after a specified time so as to minimize the risk factor. There is also an option of “convertibility” which gives the investor a chance to convert bond into equity depending on the performance of the creditor. In some cases company reserves the right to take back their bonds before the maturity date however, the creditor then gets liable to pay premium. For instance if the bonds have a maturity date of say 10years and they call their bonds in 5 years so, the company will have to pay some premium as the investor got less interest than contracted. The investor also has the option of suing the company if it fails to pay the interest or seize the assets if a term like that is stipulated in the contract.Convertible and non-convertible debentures are two types of debentures. Convertible debentures give the investor a chance to change their bonds into equity however, with this option the rate of return diminishes in convertible debentures. While non-convertible debentures are regular debentures with no option of getting converted to equity but the interest rates are more attractive in these debentures.